Edgar Filing: CITY NATIONAL CORP

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2005

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-10521

CITY NATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		95-2568550
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

City National Center
400 North Roxbury Drive, Beverly Hills, California		90210
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (310) 888-6000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES x NO o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

YES x NO o

Number of shares of common stock outstanding at April 30, 2005 49,045,584

PART 1—FINANCIAL INFORMATON

ITEM 1. FINANCIAL STATEMENTS

CITY NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET

	March 31,				December 31,				March 31,
	2005				2004				2004
	(Unaudited)								(Unaudited)
	Dollars in thousands, except per share amounts
Assets
Cash and due from banks		$	386,999			$	240,492			$	472,541
Federal funds sold		190,000				427,000				519,000
Due from banks—interest-bearing		36,982				236,362				34,570
Securities available-for-sale—cost $4,085,560; $4,114,620 and $3,563,508 at March 31, 2005, December 31, 2004 and March 31, 2004, respectively		4,018,969				4,114,298				3,612,173
Trading account securities		37,490				75,878				39,549
Loans		8,585,463				8,494,187				7,967,639
Less allowance for credit losses		147,607				148,568				154,498
Net loans		8,437,856				8,345,619				7,813,141
Premises and equipment, net		68,354				68,624				60,175
Deferred tax asset		132,143				102,196				60,049
Goodwill		251,494				253,740				253,737
Intangibles		39,622				41,063				46,120
Bank-owned life insurance		65,809				64,969				63,510
Affordable housing investments		60,898				62,864				65,831
Other assets		188,272				193,693				186,085
Customers’ acceptance liability		3,150				4,715				4,617
Total assets		$	13,918,038			$	14,231,513			$	13,231,098
Liabilities
Demand deposits		$	6,069,061			$	6,026,428			$	5,525,627
Interest checking deposits		828,510				889,512				833,003
Money market deposits		3,585,904				3,760,142				3,535,809
Savings deposits		194,928				196,366				196,153
Time deposits—under $100,000		182,277				181,618				195,053
Time deposits—$100,000 and over		901,944				932,849				849,032
Total deposits		11,762,624				11,986,915				11,134,677
Federal funds purchased and securities sold under repurchase agreements		155,645				204,654				88,063
Other short-term borrowings		125				125				50,125
Subordinated debt		280,068				288,934				300,758
Long-term debt		224,829				230,416				239,804
Reserve for unfunded credit commitments		12,944				11,751				10,574
Other liabilities		132,945				129,106				135,370
Acceptances outstanding		3,150				4,715				4,617
Total liabilities		12,572,330				12,856,616				11,963,988
Minority interest in consolidated subsidiaries		25,525				26,362				27,180
Commitments and contingencies
Shareholders’ Equity
Preferred Stock authorized—5,000,000; none outstanding		—				—				—
Common Stock-par value—$1.00; authorized—75,000,000; Issued—50,712,226; 50,589,408 and 50,583,124 shares at March 31, 2005, December 31, 2004 and March 31, 2004, respectively		50,712				50,589				50,583
Additional paid-in capital		419,505				410,216				409,235
Accumulated other comprehensive income		(43,288		)		(1,352		)		32,237
Retained earnings		995,688				957,987				849,859
Deferred equity compensation		(19,893		)		(12,262		)		(14,343		)
Treasury shares, at cost—1,334,703; 1,042,629; and 1,754,657 shares at March 31, 2005, December 31, 2004 and March 31, 2004, respectively		(82,541		)		(56,643		)		(87,641		)
Total shareholders’ equity		1,320,183				1,348,535				1,239,930
Total liabilities and shareholders’ equity		$	13,918,038			$	14,231,513			$	13,231,098

See accompanying Notes to the Unaudited Consolidated Financial Statements.

CITY NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

	For the three months ended March 31,
	2005			2004
	In thousands, except per share amounts
Interest Income
Loans		$	125,257		$	105,986
Securities available-for-sale		41,750			37,201
Trading account securities		217			38
Federal funds sold and securities purchased under resale agreements		211			432
Due from banks—interest-bearing		215			140
Total interest income		167,650			143,797
Interest Expense
Deposits		15,243			9,752
Federal funds purchased and securities sold under repurchase agreements		1,456			244
Other short-term borrowings		4			173
Subordinated debt		2,208			1,217
Other long-term debt		2,313			1,439
Total interest expense		21,224			12,825
Net interest income		146,426			130,972
Provision for credit losses		—			—
Net interest income after provision for credit losses		146,426			130,972
Noninterest Income
Trust and investment fees		19,437			15,588
Brokerage and mutual fund fees		9,868			8,726
Cash management and deposit transaction charges		9,010			11,098
International services		4,888			5,126
Bank-owned life insurance		864			831
Gain on sale of loans and assets		23			—
Gain on sale of securities		255			629
Other		6,013			4,572
Total noninterest income		50,358			46,570
Noninterest Expense
Salaries and employee benefits		66,632			59,676
Net occupancy of premises		7,616			7,308
Professional fees		8,714			6,106
Information services		5,166			4,522
Depreciation		3,615			3,228
Marketing and advertising		3,574			3,507
Office services		2,489			2,419
Amortization of intangibles		1,441			1,759
Equipment		549			765
Other operating		6,708			5,241
Total noninterest expense		106,504			94,531
Minority interest in net income of consolidated subsidiaries		1,811			1,600
Income before income taxes		88,469			81,411
Income taxes		33,008			30,513
Net income		$	55,461		$	50,898
Net income per share, basic		$	1.13		$	1.04
Net income per share, diluted		$	1.09		$	1.00
Shares used to compute income per share, basic		49,162			48,732
Shares used to compute income per share, diluted		51,030			50,679
Dividends per share		$	0.36		$	0.32

See accompanying Notes to the Unaudited Consolidated Financial Statements.

CITY NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	For the three months ended March 31,
	2005				2004
	Dollars in thousands
Cash Flows From Operating Activities
Net income		$	55,461			$	50,898
Adjustments to net income:
Provision for credit losses		—				—
Amortization of restricted stock grants		882				508
Amortization of intangibles		1,441				1,759
Depreciation and software amortization		4,569				4,193
Tax benefit from exercise of stock options		2,138				1,673
Deferred income tax benefit		(29,947		)		(8,171		)
Gain on sales of loans and assets		(23		)		—
Gain on sales and write-down of securities		(255		)		(629		)
Net (increase) decrease in other assets and other liabilities		(1,317		)		6,800
Net decrease in trading securities		38,388				51,986
Other, net		23,999				3,668
Net cash provided by operating activities		95,336				112,685
Cash Flows From Investing Activities
Purchase of securities		(105,046		)		(455,043		)
Sales of securities available-for-sale		—				46,799
Maturities and paydowns of securities		133,610				193,811
Loan originations net of principal collections		(91,276		)		(84,897		)
Purchase of premises and equipment		(4,299		)		(1,649		)
Net cash used by investing activities		(67,011		)		(300,979		)
Cash Flows From Financing Activities
Net (decrease) increase in deposits		(224,291		)		197,614
Net decrease in federal funds purchased and securities sold under repurchase agreements		(49,009		)		(23,650		)
Net decrease in short-term borrowings, net of transfers from long-term debt		—				(15,010		)
Proceeds from exercise of stock options		7,229				7,273
Stock repurchases		(34,367		)		(43,382		)
Cash dividends paid		(17,760		)		(15,630		)
Net cash (used) provided by financing activities		(318,198		)		107,215
Net decrease in cash and cash equivalents		(289,873		)		(81,079		)
Cash and cash equivalents at beginning of period		903,854				1,107,190
Cash and cash equivalents at end of period		$	613,981			$	1,026,111
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest		$	27,886			$	20,170
Income taxes		2,439				—
Non-cash investing activities:
Transfers from loans to foreclosed assets		$	—			$	—
Transfers from long-term debt to short-term borrowings		—				—

See accompanying Notes to the Unaudited Consolidated Financial Statements.

CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME

(Unaudited)

									Accumulated
					Additional				other																Total
	Shares	Common			paid-in				comprehensive				Retained				Deferred				Treasury				shareholders’
	issued	stock			capital				income				Earnings				Compensation				stock				equity
	Dollars in thousands
Balance, December 31, 2003	50,459,716		$	50,460		$	401,233			$	12,903			$	814,591			$	(6,699	)		$	(53,232	)		$	1,219,256
Net income	—		—			—				—				50,898				—				—				50,898
Other comprehensive income, net of tax
Net unrealized gain on securities available-for-sale, net of reclassification adjustment of $0.3 million of net losses included in net income	—		—			—				19,493				—				—				—				19,493
Net unrealized loss on cash flow hedges, net of reclassification of $1.3 million of net gains included in net income	—		—			—				(159		)		—				—				—				(159		)
Total other comprehensive income	—		—			—				19,334				—				—				—				70,232
Issuance of shares for stock options						(1,700		)														8,973				7,273
Restricted stock grants	123,408		123			8,029				—				—				(8,152		)		—				—
Amortization of deferred compensation for stock grants	—		—			—				—				—				508				—				508
Tax benefit from stock options	—		—			1,673				—				—				—				—				1,673
Cash dividends	—		—			—				—				(15,630		)		—				—				(15,630		)
Repurchased shares, net	—		—			—				—				—				—				(43,382		)		(43,382		)
Balance, March 31, 2004	50,583,124		$	50,583		$	409,235			$	32,237			$	849,859			$	(14,343	)		$	(87,641	)		$	1,239,930
Balance, December 31, 2004	50,589,408		$	50,589		$	410,216			$	(1,352	)		$	957,987			$	(12,262	)		$	(56,643	)		$	1,348,535
Net income	—		—			—				—				55,461				—				—				55,461
Other comprehensive income, net of tax
Net unrealized loss on securities available-for-sale, no reclassification adjustment in net income	—		—			—				(38,404		)		—				—				—				(38,404		)
Net unrealized loss on cash flow hedges, net of reclassification of $0.7 million of net gains included in net income	—		—			—				(3,532		)		—				—				—				(3,532		)
Total other comprehensive income	—		—			—				(41,936		)														13,525
Issuance of shares for stock options	—		—			(1,240		)		—								—				8,469				7,229
Restricted stock grants	122,818		123			8,391				—				—				(8,514		)						—
Amortization of deferred compensation for stock grants	—		—			—				—				—				883				—				883
Tax benefit from stock options	—		—			2,138				—				—				—				—				2,138
Cash dividends	—		—			—				—				(17,760		)		—				—				(17,760		)
Repurchased shares, net	—		—			—				—				—				—				(34,367		)		(34,367		)
Balance, March 31, 2005	50,712,226		$	50,712		$	419,505			$	(43,288	)		$	995,688			$	(19,893	)		$	(82,541	)		$	1,320,183

See accompanying Notes to Consolidated Financial Statements.

CITY NATIONAL CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. City National Corporation (the Corporation) is the holding company for City National Bank (the Bank). Because the Bank comprises substantially all of the business of the Corporation, references to the “Company” mean the Corporation and the Bank together.

2. The results of operations reflect any interim adjustments, all of which are of a normal recurring nature and which, in the opinion of management, are necessary for a fair presentation of the results for the interim period presented. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2004. The results for the 2005 interim period are not necessarily indicative of the results expected for the full year.

3. Trading account securities are stated at fair value. Investments not classified as trading securities are classified as securities available-for-sale and recorded at fair value. Unrealized holding gains or losses for securities available-for-sale, net of taxes are excluded from net income and are reported as other comprehensive income, which is shown as a separate component of shareholders’ equity.

4. Certain prior periods’ data have been reclassified to conform to current period presentation.

5. The following table provides information about purchases by the Company of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act during the quarter ended March 31, 2005.

Period	Total Number of Shares (or Units) Purchased			Average Price Paid per Share (or Unit)			Total number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs			Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
01/01/05 - 01/31/05		187,300			$	69.54		187,300			822,200
02/01/05 - 02/28/05		1,480	(3)		41.56			—			822,200
02/01/05 - 02/28/05		86,100			69.47			86,100			736,100
03/01/05 - 03/31/05		222,100			69.16			222,100			514,000
		496,980			69.28			495,500	(1)		514,000	(2)

(1) We repurchased an aggregate of 495,500 shares of our common stock pursuant to the repurchase program that we publicly announced on May 24, 2004 (the “Program”).

(2) Remaining shares available for repurchase pursuant to the program approved on May 24, 2004 by our Board of Directors. Unless terminated earlier by resolution of our Board of Directors, the program will expire when we have repurchased all shares authorized for repurchase thereunder.

(3) During the first quarter of 2005, 1,480 shares were received in payment of the exercise price of stock options.

Basic earnings per share is based on the weighted average shares of common stock outstanding less unvested restricted shares and units. Diluted earnings per share gives effect to all dilutive potential common shares which consists of stock options and restricted shares and units that were outstanding during the period. At March 31, 2005, 2,290 stock options were antidilutive compared with 481,758 antidilutive stock options at March 31, 2004.

6. The Company applies APB Opinion No. 25 “Accounting for Stock Issued to Employees” in accounting for stock option plans and, accordingly, no compensation cost has been recognized for its plans in the financial statements. As a practice, the Corporation’s stock option grants are such that the exercise price equals the current market price of the common stock. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123 “Share-Based Payment” using the Black Scholes option-pricing model, the Company’s proforma net income would have been reduced to the proforma amounts indicated below:

	For the three months ended March 31,
	2005				2004
	Dollars in thousands, except for per share amounts
Net Income, as reported		$	55,461			$	50,898
Total stock-based employee compensation expense under the fair-value method for all awards net of tax		(1,533		)		(1,240		)
Proforma Net Income		53,928				50,175
Shares basic, as reported		49,162				48,732
Shares diluted, as reported		51,030				50,679
Net Income per share, basic, as reported		1.13				1.04
Proforma Net Income per share, basic		1.10				1.03
Net Income per share, diluted, as reported		1.09				1.00
Proforma Net Income per share, diluted		1.06				0.99
Percentage reduction in net income per share diluted		3.05		%		1.00		%

Beginning in the second quarter of 2003, stock-based compensation performance awards included restricted stock grants with fewer stock options. The Company recorded $882,000 in expense for restricted stock awards in the first quarter of 2005 compared with $508,000 for the first quarter of 2004.

The Black Scholes option-pricing model requires assumptions on the expected life of the options based upon the pattern of exercise of options granted by the Corporation in the past; volatility based on changes in the price of the Corporation’s common stock during the past 10 years, measured monthly; the dividend yield and the risk-free investment rate. Actual dividend payments will depend upon a number of factors, including future financial results, and may differ substantially from the assumption. The risk-free investment rate is based on the yield on 10-year U.S. Treasury Notes on the grant date.

The actual value, if any, which a grantee may realize will depend upon the difference between the option exercise price and the market price of the Corporation’s common stock on the date of exercise.

On April 14, 2005 the Securities and Exchange Commission announced a new rule delaying the implementation of Statement of Financial Accounting Standards No. 123R, Share-Based Payment. The Commission’s new rule allows companies to implement Statement No. 123R at the start of their next fiscal year which begins after June 15, 2005. The Company will comply with the requirements of Statement No. 123R as of January 1, 2006.

7. On April 1, 2003, the Corporation acquired Convergent Capital Management LLC, a privately-held Chicago-based company, and substantially all of its asset management holdings, including its majority ownership interests in eight asset management firms and minority interests in two additional firms. Combined, these 10 firms managed assets of approximately $11.8 billion as of March 31, 2005. The purchase price was $49.0 million, comprised of cash and the assumption of approximately $7.5 million

of debt. The acquisition resulted in $25.8 million in customer contract intangibles, which are being amortized over 20 years, and $21.5 million in goodwill.

8. As we previously reported, the California Franchise Tax Board has taken the position that certain real estate investment trust (‘REIT’) and registered investment company (‘RIC’) tax deductions shall be disallowed under California law. As of March 31, 2005, the Company continues to reflect a net $36.4 million state tax receivable for the years 2000, 2001 and 2002 after giving effect to reserves for loss contingencies on the refund claims, or an equivalent of $23.7 million after giving effect to Federal tax benefits. Although management intends to aggressively pursue its claims for REIT and RIC refunds for the 2000 to 2002 tax years, no outcome can be predicted with certainty and an adverse outcome on the refund claims could result in a loss of all or a portion of the net $23.7 million state tax receivable.

9. The Corporation has a profit sharing retirement plan covering eligible employees. Contributions are made annually and are allocated to participants based on their salaries. For the first quarter of 2005, the company recorded profit sharing contributions expense of $4.7 million, compared to $3.9 million for the first quarter of 2004.

As previously reported, during 2002 a Supplemental Executive Retirement Plan (‘SERP’) was created for one of the officers of the Company. At March 31, 2005, there was a $2.2 million unfunded pension liability and a $0.8 million intangible asset related to this plan. The total expense for the first quarter of 2005 and 2004 was $0.2 million and $0.3 million, respectively.

10. As previously disclosed, City National Bank entered into a consent agreement with the Office of the Comptroller of the Currency on February 23, 2005 in connection with compliance with the Bank Secrecy Act and the USA Patriot Act, and paid a monetary assessment of $750,000 in the first quarter.

CITY NATIONAL CORPORATION
FINANCIAL HIGHLIGHTS
(Unaudited)

										Percentage change
	At or for the three months ended									March 31, 2005 from
	March 31,			December 31,			March 31,			December 31,			March 31,
	2005			2004			2004			2004			2004
	Dollars in thousands, except per share amounts
For The Quarter
Net income	$	55,461		$	49,746		$	50,898			11	%		9	%
Net income per common share, diluted	1.09			0.97			1.00				12			9
Dividends, per common share	0.36			0.32			0.32				13			13
At Quarter End
Assets	$	13,918,038		$	14,231,513		$	13,231,098			(2	)		5
Loans	8,585,463			8,494,187			7,967,639				1			8
Securities	4,018,969			4,114,298			3,612,173				(2	)		11
Deposits	11,762,624			11,986,915			11,134,677				(2	)		6
Shareholders’ equity	1,320,183			1,348,535			1,239,930				(2	)		6
Book value per share	26.97			27.39			25.54				(2	)		6
Average Balances
Assets	$	13,873,392		$	14,120,530		$	12,617,328			(2	)		10
Loans	8,585,201			8,356,557			7,886,333				3			9
Securities	4,115,383			4,012,183			3,462,547				3			19
Deposits	11,572,401			11,938,672			10,533,471				(3	)		10
Shareholders’ equity	1,352,472			1,330,614			1,222,017				2			11
Selected Ratios
Return on average assets	1.62		%	1.40		%	1.62		%		16			0
Return on average shareholders’ equity	16.63			14.87			16.75				12			(1	)
Corporation’s tier 1 leverage	8.12			7.83			7.60				4			7
Corporation’s tier 1 risk-based capital	11.69			11.51			10.65				2			10
Corporation’s total risk-based capital	15.27			15.11			14.41				1			6
Average shareholders’ equity to average assets	9.75			9.42			9.69				3			1
Dividend payout ratio, per share	32.02			31.81			30.71				1			4
Net interest margin	4.75			4.54			4.66				5			2
Efficiency ratio(1)	54.10			56.69			53.39				(5	)		1
Asset Quality Ratios
Nonaccrual loans to total loans	0.35		%	0.41		%	0.54		%		(15	)		(35	)
Nonaccrual loans and ORE to total loans and ORE	0.35			0.41			0.54				(15	)		(35	)
Allowance for loan losses to total loans	1.72			1.75			1.94				(2	)		(11	)
Allowance for loan losses to nonaccrual loans	493.37			428.92			361.54				15			36
Net charge-offs to average loans—annualized	0.01			—			(0.05		)		N/M			(120	)

(1) The efficiency ratio is defined as noninterest expense, excluding ORE expense, divided by total revenue (net interest income on a tax-equivalent basis and noninterest income).

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

See “Cautionary Statement for Purposes of the ‘Safe Harbor’ Provisions of the Private Securities Litigation Reform Act of 1995,” below relating to “forward-looking” statements included in this report.

RESULTS OF OPERATIONS

Critical Accounting Policies

The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. The Company has identified four policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts could be reported under different conditions or using different assumptions. These policies relate to the accounting for securities, allowance for credit losses, derivatives and hedging activities, and stock-based performance plans. The Company, with the concurrence of the Audit Committee and the Compensation, Nominating and Governance Committee, has reviewed and approved these critical accounting policies, which are further described in Management’s Discussion and Analysis and Note 1 (Summary of Significant Accounting Policies) to the Consolidated Financial Statements in the Company’s 2004 Form 10-K as of December 31, 2004.

Overview

The Corporation recorded net income of $55.5 million, or $1.09 per share, for the first quarter of 2005 compared with $50.9 million, or $1.00 per share, for the first quarter of 2004 and $49.7 million, or $0.97 per share, for the fourth quarter of 2004.

Highlights

· Revenue for the first quarter of 2005 rose 11 percent over the same period a year ago and 5 percent over the fourth quarter of 2004.

· The net interest margin of 4.75 percent at March 31, 2005 represents a 21-basis-point increase over the December 31, 2004 net interest margin of 4.54 percent, and a 9-basis-point increase over the March 31, 2004 net interest margin of 4.66 percent.

· No provision for credit losses was recorded for the seventh consecutive quarter, a result of continued strong credit quality and an adequate current level of the allowance for loan losses and the reserve for off-balance sheet credit commitments. Nonaccrual loans as of March 31, 2005 were $29.9 million, down 30 percent from March 31, 2004 and 14 percent from December 31, 2004.

· Average deposits and average core deposits were both up 10 percent for the first quarter of 2005 from the first quarter a year ago due to continued bank-wide growth. Average core deposits represented 92 percent of the total average deposit base for the first quarter of 2005.

· First-quarter average loans increased 9 percent from the same period last year to $8.6 billion.

· Average securities for the first quarter of 2005 were up 19 percent from the same period a year ago as deposit growth outpaced loan growth in 2004.

Outlook

As disclosed in the Company’s press release on first-quarter earnings, management continues to expect the growth of earnings per share for 2005 to be approximately 11 to 14 percent higher than earnings per share for 2004.

Revenues

Revenue (net interest income plus noninterest income) for the first quarter of 2005 increased 11 percent to $196.8 million compared with $177.5 million for the first quarter of 2004 due to higher net interest income and wealth management fees. Revenue was up 5 percent from the fourth quarter of 2004.

Net Interest Income

Fully taxable-equivalent net interest income reached $149.9 million in the first quarter of 2005, up 12 percent from $134.3 million for the same period last year. Compared to the fourth quarter of 2004, fully taxable-equivalent net interest income grew 1 percent from $148.8 million. The net interest margin was 9 basis points higher than the first quarter of 2004 and 21 basis points higher than the fourth quarter of 2004. Both higher yields and higher average interest-earning assets contributed to the increases in net interest income and the net interest margin from the same period last year. Higher yields are responsible for the increases from the fourth quarter of 2004.

	For the three months ended										For the three
	March 31,								%		months ended				%
	2005				2004				Change		December 31, 2004				Change
	Dollars in millions
Average Loans		$	8,585.2			$	7,886.3			9		$	8,356.6			3
Average Securities		4,115.4				3,462.5				19		4,012.2				3
Average Earning Assets		12,798.5				11,601.9				10		13,039.6				(2	)
Average Deposits		11,572.4				10,533.5				10		11,938.7				(3	)
Average Core Deposits		10,628.3				9,621.2				10		11,074.4				(4	)
Fully Taxable-Equivalent Net Interest Income		149.9				134.3				12		148.8				1
Net Interest Margin		4.75		%		4.66		%		2		4.54		%		5

Compared with the prior-year first-quarter averages, residential mortgage loans rose 17 percent, real estate construction loans rose 22 percent, commercial real estate mortgage loans rose 4 percent and commercial loans increased 2 percent. Compared with the prior quarter, average loans increased in all categories except installment loans.

Period-end March 31, 2005 loans increased $91.3 million from December 31, 2004, reflecting growth in commercial lending and most real estate-related loan categories.

Average securities increased 19 percent for the first quarter of 2005 compared with the same period for 2004 primarily due to deposit growth outpacing loan growth. Average securities were 3 percent higher than the fourth quarter of 2004. As of March 31, 2005 the unrealized net loss on securities available-for-sale was $66.6 million. The average duration of total available-for-sale securities at March 31, 2005 was 3.5 years compared with 3.0 years at December 31, 2004 and 3.1 years at March 31, 2004.

Average deposits during the first quarter of 2005 increased 10 percent over the same period last year and decreased 3 percent from the fourth quarter of 2004. Average core deposits represented 92 percent of the total average deposit base for the first quarter of 2005, compared with 91 percent for the first quarter of 2004 and 93 percent for the fourth quarter of 2004. New clients and higher balances maintained contributed to the year-over-year growth of deposits while the decrease from the 2004 fourth-quarter is

due to the variability of our specialty deposit business, which totaled approximately $1.8 billion at March 31, 2005.

The Company had $1.4 billion notional value of “plain vanilla” interest rate swaps at March 31, 2005, which are part of its long-standing asset-liability management strategy of hedging loans, deposits, and borrowings. The swaps added $4.8 million to net interest income in the first quarter of 2005, compared with $8.3 million in the first quarter of 2004 and $5.9 million in the fourth quarter of 2004. These amounts included $3.6 million, $6.0 million, and $4.4 million, respectively, for interest rate swaps qualifying as fair value hedges. Income from swaps qualifying as cash-flow hedges was $1.2 million for the first quarter of 2005, compared with $2.3 million for the first quarter of 2004, and $1.5 million for the fourth quarter of 2004. Income from existing swaps qualifying as cash-flow hedges of loans expected to be recorded in net interest income within the next 12 months is $1.7 million.

Interest recovered on nonaccrual and charged-off loans included in net interest income for the first quarter of 2005 was $0.5 million, compared with $0.7 million for the first quarter of 2004, and $0.2 million for the fourth quarter of 2004.

The Bank’s prime rate was 5.75 percent as of March 31, 2005, an increase of 175 basis points over March 31, 2004.

The following table presents the components of net interest income on a fully taxable-equivalent basis for the three months ended March 31, 2005 and 2004. To compare the tax-exempt asset yields to taxable yields, amounts are adjusted to pre-tax equivalents based on the marginal corporate federal tax rate of 35 percent.

Net Interest Income Summary

	For the three months ended								For the three months ended
	March 31, 2005								March 31, 2004
			Interest			Average					Interest			Average
	Average		income/			interest			Average		income/			interest
	Balance		expense(2)			rate			Balance		expense(2)			rate
	Dollars in thousands
Assets
Interest-earning assets
Loans
Commercial	$	3,236,444		$	45,946		5.76	%	$	3,172,149		$	40,142		5.09	%
Commercial real estate mortgages	1,876,720			30,415			6.57		1,807,549			28,203			6.28
Residential mortgages	2,285,759			31,358			5.56		1,952,305			26,801			5.52
Real estate construction	829,702			13,569			6.63		678,479			8,571			5.08
Equity lines of credit	265,417			3,550			5.42		194,184			2,011			4.17
Installment	91,159			1,513			6.73		81,667			1,432			7.05
Total loans(1)	8,585,201			126,351			5.97		7,886,333			107,160			5.47
Due from banks—interest-bearing	64,917			215			1.34		78,348			140			0.72
Federal funds sold and securities purchased under resale agreements	33,004			211			2.59		174,649			432			0.99
Securities available-for-sale	4,077,915			44,084			4.38		3,432,391			39,390			4.62
Trading account securities	37,468			222			2.40		30,156			39